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tv   The Call  CNBC  July 24, 2009 11:00am-12:00pm EDT

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pitt, also founder and ceo of california partners, and cnbc's own rick santelli. mr. harvey pitt, let me go to you first. the s.e.c. is nowhere to be found in this hearing. do you have a thought on this? >> yeah, i think it indicates that there's been a devaluation of the s.e.c.'s standard us, which i think is terribly unfortunate. although the current proposals, at least known to eliminate the s.e.c. and its critical functions, which is at least a positive. >> yeah. i mean, we just broke also at the thing that troubles me most in this whole statement, larry and i were talking about this, requiring the fed to receive written approval from the treasury before exercising its emergency lending authority. that's a huge change, it creates a lot of problems, right, harvey? i mean, that almost instantly politicizes the fed if you dibl believe the fed was politicized
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which i don't but larry does. >> i couldn't agree more. i think that it's very important to have an independent regulatory body looking at monetary policy, systemic risk and the like. and what's really happening now is that all of this is being broadened or the administration's political influence, and i think that's a huge mistake. >> rick santelli, bringing you in, good to see you this morning after our discussions last evening. it was great fun. thank you for helping us. look, rick, i'm not that enthusiastic about all this financial regulatory reform. and i want to ask you, is this another sarbanes oxley that will completely stifle the innovation, the entrepreneurcia. >> i think that exists, we don't know the financial direction this is going to take, but a lot like many other programs, whether it's health care or what not, the intentions and the need
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for something is painfully obvious. but the road to getting there, and what we end up with when we arrive there has huge amounts of unintended consequences that need to be considered, and i still think for regulatory standpoint, the biggest story of the day in terms of the chatter in the arenas that i hang out was the story cnbc broke earlier about sheila bair saying what's off balance sheet should be considered on balance sheet. i think the logic in that is at the up most he said of why we need some form of a stronger reform policy, and we have to be careful. you know, the original glass-steagall was written in very simple words and wasn't that long. >> can you just walk through that for a minute? this is regarding banks, and they list a lot of loans, loans that are being worked out today, toxic assets, good bank, bad bank. is that what you're talking about? >> exactly. when something is off balance sheet, it effects your capital, set-aside capital in a much
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different way. it basically takes bad things that don't effect on-balance sheets. so from a regulatory standpoint, it's a business deceiving, and it's a bit deceiving to all of the investors, because these various corporate and financing structures aren't easy to get information on, and they don't effect the normal stress test that happened on balance sheet items. >> yeah. harvey, do you agree with that? is there a legitimate reason to be able to put various assets in a side pocket or off balance sheets? is there a good reason for it? >> no, whatever the rationales were originally, we saw this problem first arise when enron hit, and the fact that people could create these special purpose vehicles. and now we're seeing it all over again. the fact of the matter is, if a corporation is exposed to potential liability, it should show up on its financial statements. >> yeah. i mean, and also, i mean, another thing as we're watching this hearing, we're watching tim geithner make this huge, you know, plea for this consumer
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protection authority. has anyone asked the question, what is it going to cost? >> well, that's the other problem with this. we're seeing it now with health care. we clearly need regulatory reform. the difficulty is, we're assuming all sorts of new regulatory burdens, and somebody is going to have to pay for that. >> yeah. >> and there isn't enough money to go around, although the government seems to keep printing it. so i think that there's a real disconnect between what they want to achieve, which is all very valid, and how they're going to get there, which i think raises serious questions. >> rick santelli, there is a discussion this morning on some of the blogs in the newspapers that part of this regulatory reform would ban something called naked credit default swaps. if anybody knows what naked credit default swaps are, it would be you. and i want to ask you if you would ban them. >> well, i'll tell you what. i have significant personal issues. this is just my opinion. with a lot of the products under
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the heading that you described for one simple reason. that a very easy litmus test tore whether derivatives work well -- and remember, futures contracts are derivatives. you know, a corn option is a derivative. corn futures. but at the bottom of these, there is something tangible. at the bottom of ten-year note futures, there is a security. at the bottom of corn futures, there's corn. but at the bottom of credit default swaps, there really isn't much. and they're very digital. either you have to pay out or you don't. it makes them very complex and prone to activities that in the end i don't know if they really insure what they're supposed to insure against. or do they create a litany of trades based on hedging and not hedging, per se, that result in pressures in stocks and companies that shouldn't exist. and i would put forth how some of the banking issues and entities, prices and equities were marked down. now, granted, i think in many ways, they deserve to be, but
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there is no transparency, either. >> but that's a free market, rick. and any time you go and you ban any sort of product out there in the market, the money is just going -- >> i disagree. i believe in free markets more than anybody. but it still doesn't mean that unfettered capitalism with a complete carte blanche -- >> ooh, unfettered. you know, that word, unfettered, it's sort of like cowboy capitalism. has a negative connotation. i've always loved cowboy capitalism. mr. harvey pitt, you are an expert in these matters, also. look, you can buy harvey, you can buy a put on a stock would you owning the underlying stock. why are these so-called naked swaps any different? >> well, first let me just assure your viewers that naked credit default swaps are not nearly as interesting as their title would imply. second, i think -- >> heard something sexy about that. >> yeah. second -- >> just like polo owe is this
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the equivalent of pole dancing? >> now we've got to reel it back in. go ahead, harvey. >> too much information. i'm sorry. go ahead, harvey. >> no. the real problem here is instead of having an outright ban on anything, the question really is, do instruments serve an economic purpose, and credit default swaps can serve a real valuable economic interest. the real approach here should be not to outlaw things, but to set the parameters when certain things create problems for our economic system, government should have the ability, and i view it as residual regulation, to step in and prevent circuit breakers from being tripped. that's the approach that would allow innovation, allow new instruments to evolve, and yet cabin them when they exceed normal tolerances. >> do we already have that,
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though? there are some who would argue the fed is in charge of regulating derivatives and just diplomat do it. >> well, i think the government was denied a lot of authority over derivatives. if you go back and look at gramm-leach-bliley and some more recent legislation, what you see is that there were specific attempts made to deny government the ability to step in. but the problem is, how you regulate them. and to me, the way they should be regulated is to watch what the impact is as opposed to outlawing any particular instrument. >> melissa, why do you think a free market guy like rick santelli is using those negative connotations with phrases like "unfettered free market competition," phrases -- >> there is no competition in them, larry. the organization that created and runs these markit, never made transparency an issue until
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these things started blowing up. >> okay. we've got to continue this on the other side of the break. we're going to take a quick break. thanks to both of you for joining us. see you again in a second. when we come back, complete market coverage as the dow try to say stay above 9000 here. >> and bob pisani and two traders join us on the floor of the new york stock exchange. back in two minutes. some are rally, down 9000, i'm still bullish. >> they're up 9000? but did you know you also get hotel price assurance? it's a one-two punch of savings -- pow! pow! lower hotel booking fees mean you get a lower total price. plus, if another orbitz customer then books the same hotel for less, we send you a check for the difference, automatically. the first complete women's multivitamin in a drink mix. with more calcium and vitamin d... to support bone and breast health... while helping you hydrate. one a day women's 2o. refreshingly healthy. you have questions. who can give you the financial advice you need?
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all right. the house financial services committee has temporarily recessed. they're talking financial regulatory reform. the lead witness is treasury man tim geithner. as you can see, it's empty. they're off voting. but when they return, we will return with our coverage on it. all right. we want to take you on a quick tour of the markets right now. the dow closing above 9000 for the first time since january, and even though we are lower on the day by a half percentage point, 44 points down on the dow, not so bad given to what happened to microsoft yesterday. still hanging on pretty good. the s&p is down about almost a full percentage point, down about 8 points. and the nasdaq right now is down about a percent and a half. but you remember that nasdaq winning streak. got to give a little something back, right, bob pisani? what's it like on the floor today? >> well, the important thing is, i have a couple observations. number one, everybody has stopped throwing out the idea that this is short covering, because they're seeing real money in. these are guys who have been undervested and need to be in just to be up on the
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performance. so can't keep using the word short covering. we have seen real money. number two, the earnings commentary has been remarkably consistent for the past week. black and dekker is a great expect. it's a very simple, generally poor sales performance. black and dekker actually came out and said their overall sales would be weaker for the year. sales down 24%. they had talked previously about sales down 20%. their guidance was a little bit on the weak side, as well for the third quarter, so there is a little bit of issues here about how their margins might be holding up. but there is the very simple story. as long as you get the margins so far holding up, the weak sales performance is not hurting companies. but there will come a point very soon, and the bears are arguing it's september/october when that will be a major issue. melissa? >> all right. thanks so much. joining us now, cnbc market analyst, steve grosso and stuart frankel and art cashen of ubs financial services. you were listening to bob. do you agree? art, let me start with you.
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>> in a tempered form, i do. i still think these earnings were not quite an unallied joy. the revenue shortfall does bother me and came come home to roost. for now, the market is on bob's side and seem to be interpreting things his way and that's what helped with the rally the last ten days. and we're pausing for breath here. >> all right. steve grasso, look, i appreciate the great art cashen's cautious view. but steve, there is a study from jpmorgan that shows sequentially on quarter by quarter from q1 to q2, 70% of these reporting companies are actually improving their revenue sales. that's something we have not focused on. year to year, the sales are down. yeah, that's a function of the economic slump. but sequentially, there is a lot of improvement in revenues that is not being accurately reported. i don't know if you've seen or heard about this study, but i want to put it on the table.
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because these numbers may be better than we think. >> i think you're 100% right. and how many times did people say we're closer to the end than we are to the beginning. i'll touchback on what bob said. i've seen real money being put to work this week. yau say that a cup he weeks ago. so it was short covering now it's real money. so if you want to talk about earnings on a level of company by company basis, we're two years into this thing since august of '07, we're two years into this. eventually, things have to start improving. and i think you're starting to see real signs. >> so steve, do you think we put in a base here? i mean, do you think that we're going to move off this 9000 number? >> i think if you look at the s&p, you know, my customers are tell meg that they don't think we're going to dip or stay much lower than 950. i think that might be a little bit aggressive, but i think we're going to hold on to a 9 handle on the s&p short term. >> i mean, art, i understand pullbacks and corrections. we may be due for one many you know a lot more about that than i do. but fundamentally, when you see an easy money fed continuing, that's what bernanke told us
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this week, when you see profits bottoming and maybe improving, when you see the whole economic recession bottoming and maybe pointing up with the leading indicators, don't you think the fundamentals are really behind this stock market rally? >> well, i do. but i think it's -- they're playing a much more anticipatory role, larry. and to shift back from the fundamentals, the technicals, i give you one for your side. we've got over 80% of the stocks above their 200-day moving average. that usually means that the rally has got further to go. everybody is in a kind of comfort position. so even if we get pull-backs and i expect one next week, i think the bulls still have the ball and can move it further. >> what is the main source? you are a wise man, and i've known you a long time. what is your main source of skepticism about the summer rally right now, art? >> well, it's -- my concern is the economy. i'm worried about the sustainability. i think what little stimulus we had may be getting used up in here.
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and i'm worried about bill gross's w. i think we may see later in the year both in the stock market and the economy another move down. that's what keeps me cautious. >> steve, does somebody dare say this morning that gridlock is bullish, when we see gridlock on the health care bill right now? do you agree with that? >> gridlock is incredibly bullish, and we're seeing the health care get watered down, the market rallies. energy bill gets pushed off to december. the market rallies. i think it's a clear message sent to washington they don't like the agenda. >> you know, let me lob another one in, steve. credit market spreads, whether they're money markets that libor test spread or whether you go out to the differential between junk bond rates and treasury rates, those spreads have narrowed so much, more than 50% now, that we're really pre-lehman levels in those credit market fear spreads. what is the reference or implication for stocks? i mean, i know pre-lehman, you
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get your -- i think above 1200 on the s&p, first we've got to get through 1000, but how does that inform you? what's the bond market telling us about profits and economic recovery that maybe stocks have to make up? >> i'll tell you something better. at the 870 level, all of my short hedge funds, they didn't get long, but covered their positions. so i think at that point, you saw the market rotation getting back into that bull mentality. and i think that tells us a whole lot. so can we get back to that 1200 level? obviously, i think we have a lot of ground to make up. but everyone i have spoken to is more aggressive than that goldman 1060 bet in the s&p. >> all right. good stuff. gentlemen, sorry we've got to leave it there. thanks ever so much. when we come back, it looked like the tech sector was going to lead stocks to higher heights. >> but then microsoft and amazon came along and disappointed wall street with their earnings. jim goldman will sort it all out when we come back. tools are uncomplicated?
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all right. the house financial services committee has taken a break. they have to go vote. they're talking about financial regulatory reform, secretary of the treasury tim geithner, the lead witness.
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it has recessed so they can vote. when they return, we will return with it for coverage. >> all right. the nasdaq down 24, tech stocks down modestly after yesterday's closing, and a 13-day winning streak on the heels of disappointing results from amazon, especially microsoft. so will the tech rally continue? here to break it down for us is cnbc silicon valley bureau chief jim goldman. jim, tell us what's going to happen. >> yes, it actually will continue. melissa, back to you. just kidding. tech investors following a 1-2 punch from ugly news from mic microsoft and lackluster news from amazon. let's look at microsoft since revenue took investors off guard. $2 billion below what the company reported for the same period a year ago. a billion dollars under wall street's expectations. this is the third quarter in a row, in fact that microsoft has missed its revenue line. every single major business unit was 200 million, 300 million, machines as much as $400 below estimates.
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the rest of this year is still looking tough. still, some analysts believe the fall of the cliff revenue was in part because of new products coming from microsoft, including windows 7 and office and server products with customers deferring purchases until that new software hits the market. now, for amazon, this is a company that also came in with a surprise, earnings that failed to justify the 80% run. this company's stock has enjoyed since the beginning of the year. and that was surprising, given the strong news from ebay just a day earlier. amazon's margin pressure and concern that the soft economy is affecting even that company spooked investors, and you can see the total that toll that report is making on amazon shares today. still, both microsoft and amazon have had quite the run over the past few weeks, and today's retreat, while significant, only erases just a couple of weeks of gains. so it might hurt, depending on when you got into these issues, but it's hardly catastrophic. >> but jim, i don't know. i'm worried about microsoft here. i mean, larry was calling it a turkey yesterday. but we were pointing out a lot of big funds are not in this
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stock. i mean, it's almost a 10% move there. today. do they have some serious long-term fundamental problems with this company? >> yes. >> has it lost its dominance? >> let's just pick up. market share. their whole operating system is losing market share, big-time. their windows system is losing market share big-time. a friend said microsoft is like a trust fund baby of. all this money flowing in, and they're doing bad things with the spare cash, jim goldman. this is a long-term story. there's nothing new going on here. >> okay. well, i a couple things. first off, this stock has done largely nothing for the better part of a decade, depending on when you got in or out, you haven't made a dime. that's issue number one. number two, is when you talk about microsoft's system losing from the market share, i'm not necessarily sure that's true at least not yet. >> that is in fact truly true. i'm sorry -- >> according to who? >> i mean, it is factually true.
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first of all, how about mowzilla firefox? can we start there? they're down to 60 -- i beg your pardon. when the justice department tried to break them up 15 years ago, they had a 90%-plus market share. that market share is down to 60%-plus. that is a big swing. factually. >> is that true? >> yes, that is true. >> 60% in what, larry? >> their -- a lot of people now are switching away. look at apple's challenge to microsoft, for heaven's sakes. >> anecdotally, i don't disagree with you. but if you look at the market resear research, and you look at microsoft's dominance globally, this is a company still firmly in control of almost every desk top out there. nine out of ten of them. so we're seeing that start to change. apple is definitely a comer. google might be, as well. you've got linux out there, too, chomping at the crumbs that microsoft is leaving. i don't deny that -- >> it's challenging. look, i've said my piece.
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but i don't want to drink the kool-aid that microsoft left out. >> no, we're not drinking kool-aid. >> i don't want to drink that kool-aid. these guys disappoint on a regular basis and have gone nowhere for ten years. >> it's terrible. we've got the point. i've got one more question for jim, though. i wanted to ask you about the palm preiphone wars, speaking of apple. there is a new development. first of all, how is the palm pre doing, but also there is battle brewing about the palm pre trying to use iphone software? >> yes, this is controversial. rbc's mike obronski is out suggesting the pre is doing well in the marketplace. >> what does that mean? statistically signature numbers? >> no. just doing well -- it's just doing well for itself, based on sales projections that the street had come up with. so it's not necessarily, you know, this massive gangbuster of a product that's eating away
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market share from apple or research in motion. but nonetheless, this is good news for palm. on that itunes issue, one of the key selling points of the palm pre was that you could seamlessly link to apple's itunes. so if you had had an iphone and switching to the pre, you just move your library seamlessly from one handset to the other. apple had a problem with that, and a lot of people in the marketplace, some attorneys said, how could palm essentially co-ops somebody else's technology in the process? there's got to be something wrong there. apple released new software a couple weeks ago, newest version of itunes that essentially cut off all of those hundreds of thousands of preusers out there who may have been interested in seamlessly linking their libraries from one system to another. that was a real problem. so palm now answers back. new software released this morning, and in a cheeky kind of blog post, they had their own one more thing. and that one more thing at palm was, we had reopened, reconnected our system linking itunes to the palm pre. you've got to wonder if apple
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now steps forward and says, you know, enough of this back and forth. we're just going to sue you. >> yeah. that's an interesting battle. all right, jim goldman. thanks for coming on and playing. we appreciate it of . >> always a pleasure. have a good day, larry. >> thanks, jim. great to see you, buddy. diet coke, not kool-aid. >> quick break and then we go to the nymex to find out what's going on in the oil. -- he's never coming back on. >> i love the guy, but i want to be hard on microsoft. stay with us, everybody, we are back in two minutes. we may have some more hearings on this financial did he regulation. summer rally. i'm still signed on. this is "the call." we are cnbc. announcer: some people buy a car based on the deal they get. - others buy the car of their dreams. - ( beeps ) during the lexus golden opportunity sales event, you can do both. it's an opportunity today. it's a lexus forever. special lease offers now available on the 2009 es 350.
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all right. take a look at crude oil. it's staging a rally of its own here, above 67 bucks. it's, you know, 3/10 of a percent on the day, only 20 cents, but above 67 bucks. is this a one-week chart? sure is. look at that rally. let's check in with sharon enper son who is on the floor of the my next. what's mind the rally? >> it's good that you have put that up because it's not what oil has done in today's session but over the past five sessions and being up over 10%. and a lot has to do with what has happened to the equities markets. yes, we have the s&p 500 down now but the 70% correlation is a big reason why we have seen this run up in crude oil prices and a lot of traders on the floor keep going back to that story in the "new york times" today about high-frequency trading saying we
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have been saying this all along, technical trading, investors looking to trade asset classes, not fundamentals. and they're looking at various scenarios and algorithms, and that's why we're seeing oil and stocks go in tandem. >> sharon, i noticed just on the boards, wholesale gasoline on the futures market has come down. and if i'm not mistaken, retail gasoline across the country has come down, even during this energy rally. so what's up with that? >> it's come down until this week. i will say that gasoline is actually been leading the rally this week in crude oil prices. today a bit of of an anomaly as it is down just a little bit. but we have seen gasoline at the pump falling over the last few days, and tuesdays started climbing higher a bit. what we're seeing right now is the fact that refiners have decided to cut their run rate so significantly that there are some that are saying that down the road, not at this exact moment, but down the road, we'll see tighter supplies or at least less of a surplus, and so that could have gasoline rallying a
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little more. >> sharon, i'm really interested in this high-frequency trading, because we have seen this phrase more and more. and it seems like if the oil market grabs on to it, it could become the new speculator. >> well, you have to pay attention to it, because a lot of these big commodities firms are trading everything. you look at citadel which is getting into cash equity trading, you know, a lot of these firms are not just focused on oil or just focused on commodities. and as they're trading all of these different asset classes, and if they're trading them as this article points out, in terms of the way it's working with algorithms and such, this is why we're seeing this kind of volatility and this kind of relationship between oil, commodities and stocks. >> but sharon, look. i'm not opposed to the investors investing in oil. i'm not opposed to the exchange traded index funds. none of that bothers me. but what does sort of bother me is the supply and demand relationship doesn't seem to suggest higher prices. >> it does not at all. >> that's what i don't get.
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what's your comment on that? >> it does not at all, and when you look at distillate demand and supply in particular and get out of summer season and into the winter season that, is a stand out with supply at a 24-year high, and demand at a 25-year low, that is very significant. there is no reason that oil prices should even be as high as they are right now, according to most folks. they should be close to $50 a barrel. but again, it's not really what is happening in terms of fundamentals. it's fund flows and all of these exogenous factors, and what could perhaps put a damper on trading is what happens in washington. a lot of analysts out today looking at regulatory reform, and the regulatory action, the discussions of what the cftc may do and what a damper that could put not only on oil prices, but on gold and commodities across the board. >> yeah. whenever i see these high-frequency trade articles come out, all i think is that someone is calling these reporters and making sure that everyone is on this story, because they're looking more -- more regulation of these markets. rick santelli, i want to bring you in.
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i mean, am a conspiracy theorist, or it always speaks to someone whispering are you following the story, this is a big deal. >> see, it's not consistent here. because i tell you what. high-frequency trading really has been a buzz issue on trading floors for a long time. >> yeah. >> but not with deference to commodities, with deference to stocks. many believe that the big run-up in stocks is driven in large part by high-frequency trades, but nobody complains there, because they like when stocks go up. you can't pick and choose. high frequency, if it's a culprit, larry, you can't say i don't like it when the fundamentals purportedly don't match with the pricing there, but i love it when it happens when it goes with stocks. >> i don't have a problem with computers or speedy transactions. >> but i would argue the fundamentals in the economy don't match 9000 dow. >> i don't care -- the commodities are going to do it, they're going to driven by market forces.
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it's a global phenomenon. you had doeps in the 1930s blaming the stock market crash on the telephone. so i don't buy into any of this stuff. what i do want to ask you is, with respect to this rally in oil, is there is a cheap dollar trade that may be encouraging oil to go up, rick? >> i think there's about six turnstiles of key issues. one is the perception of a weaker dollar based on a variety of factors. you know as a top economist, along with the notion that there could be hoarding by countries, no matter what the fundamentals are. and, of course, some of the issues regarding what big inventories that don't match pricing, how that affects what they do with the inventories moving forward. it's not as easy as it appears. >> yeah. >> it's not one factor. and that dollar, of course, has been a very big component, and what we have seen in the run-up in oil. but, again, as rick mentioned, it's the perception of a weaker dollar, because the dollar hasn't fluctuated that much, at least particularly in this last
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week, as we have seen this rally. >> that's a great point, guys. and we leave it there, because actually, we're keeping our eye right here, awaiting the question and answer session with treasury secretary tim geithner. we see him sitting down, but it hasn't yet started. let's bring in harvey pitt. switching gears a little bit, one of the suggests that we have seen along the way here of how to reform regulation is putting a fed member on the fdic. what do you think of that, harry? >> well, i think it's useful to have coordination between the agencies. i don't know that you absolutely need somebody from the fed on the fdic, but working more closely together is clearly a requisite effort and should be done. >> all right. we're going to take a quick break. harvey, please stay where you are. mr. geithner is lining up. the house members of the financial services committee are coming back slowly into the hearing. we'll dive into all these important things. first up, commercial break. melissa francis, larry kudlow, this is "the call" on cnbc.or
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all are backed with the best coverage in america, including a 5 year/100,000 mile powertrain warranty. get some excitement while you still can, during the pontiac summer closeout. visit all right. house financial services committee barney frank has reconvened his meeting with mr. tim knee gui timothy geithner. >> i voted against the bill on the floor because of unrelated -- not to fannie and freddie, but housing issues and wrote to the senate saying let's work this out. the senate never took the bill up. of the senate chair, republican
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chair, apparently felt that it wasn't at this point worth trying, probably because he had some republican opposition within him. but then in 2007, as it was clear there was a crisis, as i did believe by 2005, the house did take it up when the committee organized after the election of 2006 and i was the chairman, the first major piece of legislation we dealt with was to reform fannie and freddie and work completely with the administration, including the powers of receivership, et cetera. the bill passed. 51-49 senate. hard to make function whether it's 51 of ds or rs, doesn't make much difference. but i did want to say that was the history. and as i said, the bill did pass in 2008. so we're not dealing with a fannie mae and freddie mac of the past. clearly, we have to do something before they can resume their role. but they are now playing a very different role than they had played before. and now mr. secretary, i was
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struck to note that there's been a debate about whether or not to have a consumer protection agency and who should be the systemic risk regulator. and it was interesting to me to know that your critics on this seem to be aligned with the socialist government in london, while the conservative government in london is on the other side. the -- i did note that the conservative pare line just came out for consumer regulator and for the bank of england being the single systemic risk regulate e which does appear to be close to your position. whereas the socialist government, the labor government, still nominally socialist, has taken the opposite side. so apparently when things cross the atlantic, they get reversed. i had not realized that that was the ideological effect of a transoceanic voyage. i think the point is this, that what we are talking about here are important issues that people of goodwill can differ about, and ideology shouldn't be
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driving this, and in many case doesn't. these are practical and pragmatic decisions to be made. the only thing i would add again is that while i strongly support the rationale of the consumer protection agency, one of the members on the other side noted that all of the regulators are against it. now, those regulators should be happy they are getting support from some corners that they don't ordinarily get. so maybe they cherish it when they get it. i am always skeptical when people are often in disagreement with somebody suddenly find great wisdom within that individual. the fact is that what we are talking about are agencies that are going to lose powers, and they object to losing their powers. and i think they have a right to make the argument that taking the powers away from them may not make sense, because the powers that will be taken away from them are in very good shape, because they have rarely been used. yes, it is true that they are pristine powers. they have sat largely undrawn upon for a while. but i think it's time to put
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them into the hands of someone who will use them. the gentleman from texas. >> i accept your apology, mr. chairman. secretary geithner, before we move on regulatory reform, i hope you will at least avail yourself of coming back one more time so we can talk about that issue. because it is of extreme importance, including what the gentleman just said about the new agency, which will design and determine appropriateness of all financial products. and so -- >> come back and talk about that, or about gses? >> that, gses, the whole -- >> okay. >> so i think it would be extremely helpful. my first question, the chairman reminded me about fannie mae, which also, you know, one of the big things on the table is how much money is the government or the taxpayers ultimately going
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to lose from everything that happened over last year. and you see some figures of $20 trillion, which, you know, that would just take -- i mean, i don't even use that figure. i just say, you know, we have seen $3 trillion is the amount outstanding. so -- but i've looked at those, and i think there are three big areas of loss, and i want to see if you sore of going forward, how much does it look like we're ultimately going to lose. biggest loss of all, $85 billion that we extended to freddie and fannie. i see no prospect of getting that money back. and would like your views on that. now, the second biggest one looks to be the car companies. you know, we extended $80 billion and it looks like we've gotten two back, and we do have an equity share. so, you know, which is going to be very problem attic. i see those as the biggest
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losses. normally, people say aig is the biggest loss. but i know the property you took on board is diminished in value, about $15 billion. so i do see a -- right now a 15 or $20 billion loss. but by far, fannie is the big one and the car companies and the chrysler finance and -- and maybe the next one -- i know that bank of america and citi, there's a lot of money there. now, of course, bear stearns and cit, we probably lost $5 billion there. but would you go over that and just tell -- are there others -- in fact, i see some of the programs are making money. but i see those two big ones are fannie being the biggest, about $85 billion, and maybe the autos at $70 billion. >> congressman, i think this would be helpful because some of these broad numbers don't capture exposure and don't represent any risk of loss to the taxpayer. and you're doing it the right way which is to look at the areas of our system which are
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most damaged, most at risk, and try to build up from that. but i don't believe we're in the position today, really, to give you a -- even this month, or maybe even this year, to give you a realistic estimate yet of those losses. that's the important thing for us to do. one of the strengths of our system is that when we make these commitments under our budget rules, we're required to sort of set aside a estimate that's set independently of the administration for potential loss to the taxpayer. let me take the positive side of this for a minute of the much as you said, some of these programs are making money. i'll give you two examples. we've had -- i think in the range of $80 billion in capital come back to the treasury. just over the last two months. >> yeah, the capital purchase plan, making money. >> and -- >> and some of the lending programs. >> and if you look at the value of the investment the government made in goldman sachs after the warrants, the government did realize that 23% annual return on investment, and that is a measure of the effectiveness of the policies congress helped put in place to try to bring more
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stability to our financial system with the effect of those actions, the ultimate cost of this crisis could prove to be very modest, relative to the scale of the risk we confronted. but we won't know that until -- >> and let me ask another question. but i think you've got fannie and the car companies are our biggest loss, looking to me, maybe aig. you know, you -- you're talking about the capital purchase plan. the idea there was, we put the money in the banks, they'll lend it, you get a multiplier effect, and then it will pass through the economy and i think velocity is the economic term there. of course, they're holding on to it, but that's because the capital requirements and they're restocking their capital and a lot them are lending. but tell me why we didn't see that multiplier effect. >> i think you did. because remember, a dollar of capital is equivalent to between 8 and $12 of lending capacity.
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so if you're short a dollar of capital, you're going to have to reduce lending by 8 to $12. >> right. >> so on the scale of our financial system, just think of this. so without that initial $200 billion of capital, the previous administration put into the financial system, you would have seen overall lending capacity decline by well over a trillion dollars. 1 to $2 trillion. so you did see the benefits of that. >> okay, good. >> the gentleman from pennsylvania. >> okay. house financial services committee is going on with its question and answer with tim geithner on regulatory reform, and a member of the committee has just stepped out to join us. republican representative michele bachmann from minnesota. thank you so much for joining us, congresswoman. let me ask you what you think of what you've heard so far. >> well, i'm thankful that the treasury secretary is before the committee. i would agree with representative baucus, i think it would be important for us to hear again from the treasury secretary. and, of course, the big question that's on all of our minds is, is this proposal serious? it's fdifficult for us to take
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the administration seriously when we're not looking at true reform of the gse. when freddie and fannie which were the root of this systemic meltdown aren't being seriously reformed, where are we going to go to get the assurances for the american public that tax dollars again won't be put into failed enterprise that is are, quote, too big to fail. in other words, it seems like a continuation of bailout nation. >> miss bachmann, on that narrow point -- we have bigger fish to fry, but on that narrow point, are there any plans that you know of to get fannie and is freddie off of the taxpayer dole? >> well, not according to the administration. and that's our concern. we want to see freddie and fannie privatized. we want to see them come off the taxpayer dole. it would be wonderful if they had to actually compete in the true marketplace, and that's our concern. it appearance the administration is seeking a tact right now, larry, where they want to take all risks out of transactions. we know what that will mean.
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that will mean ultimately we won't see profits in the future. we won't see the type of investments that we need to have to resume our prosperity and our preeminence globally. >> can i just ask -- if we're still there, one follow-up on this. t at president obama's news conference the other night, he talked about special fines placed on what he calls risky transactions by banks, and so forth. what do you know about these special fines? this kind of caught wall street and a lot people by surprise. >> oh, it absolutely did. and the president and the white house have been fairly mum on what these fines would be. we have a lot of questions about that. that's exactly why, larry, we need to have the treasury secretary come back before the financial services committee, so we can find out what the president has in mind. this could be devastating, again, for risk takers and for wall street. and we need to know so that we can bring certain -- remember, again, this is all about bringing certainty back into the
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marketplace, and unfortunately, the white house seems to continue to pour uncertainty into this field and keeping us volatile. >> congresswoman bachmann, thanks for joining us. we appreciate it. and we want to listen back into the hearing right now. >> insurance companies, and in aig, one of the thing at the center of this crisis was you had entities that were nominally insurance companies with no federal oversight of any meaningful level writing dramatically large commitments with credit protection with no meaningful levels of capital against that. and that's something we can't afford to allow to happen in the future. so i think the framework that we proposed, which largely is something you proposed, to begin the process of putting in it place federal level oversight, it will be very important. it will be very important. but, of course, our job is not just to, you know, deal with the last war. but to make sure we're putting in place something that's going to capture those weaknesses, vulnerabilities more quickly in the future. but i think you're hiding one
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particular example of the weakness of our current framework. >> okay. well, i appreciate and look forward to working with you, and we shouldn't be anymore than one telephone call away u mr. secretary. i yield back my time, mr. chairman. >> the gentleman from texas. >> thank you, mr. chairman. welcome, mr. secretary. it's always good to see you. if i had more than five minutes, we would actually talk about a few of the things that we agree on. but given limited time, i must admit -- >> i could use my time to discuss those. >> on your time yes, on my time, no. let's continue on with our gse history lesson, if we can. begin in 1990, fannie and freddie's investment portfolios grew ten-fold. in had 1995, hud first authorized fannie and freddie to purchase subprime securities, including loans to lo low-borrowers. in 2004, fannie and freddie purchased $175 billion in subprime mortgages, accounting
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for 44% of the market. from '05 to '0 7, fannie and freddie purchased approximately a trillion, a number that's all too common in this congress, a trillion dollars in subprime and all-pay loans. and the list goes on. that's the history. where do we find ourselves today? we know that fannie and freddie share the origination market has now increased from roughly half to 75%. at last look, the taxpayers have paid out, i believe, $85 billion that none of us expect to get back. they're on the hook for an additional $315 billion. principally for helping securitize loans to people who couldn't afford to pay them back in the first place. now, mr. secretary, you have said in i believe in rolling out the white paper before the senate banking committee on june 18th, quote, we wanted to make sure we were focusing on central issues of this crisis. i know you're concerned about
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fannie and freddie, but as a logical conclusion, since there is not a proposal beyond a study of the gses and the administration's proposal that the administration has concluded that fannie and freddie were not a central cause of the crisis. >> no. i would say that congress in his wisdom passed legislative authority that provided for, for first time, a modern oversight capacity over this institution. that was done in the summer of 2008. >> so if i could, mr. secretary -- >> they did play -- >> time is limited. so it is a central cause, but do you believe to a great extent it has already been remedied? >> no. i guess i would say -- can i just finish this one thing? i -- and i agree with you on this. as a government, we're going to have to figure out their future. what they are today is not going to be their future. it is not in their future. >> but why not include it in the legislative proposal, if it is a central cause and needs to be addressed?
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>> because we're rarely accused of insufficient ambition. we're taking on a lot of things. we're trying to solve a lot of problems in this area, and we think we want to do that one, don't need to do that right now. cannot credibly begin to think about that reasonably right now, because they are now the entire mortgage market in the country, because of the deep failures we saw across the banking system. but that time will come, and i think it will come relatively quickly. >> i understand your answer, mr. secretary. i have limited time. let's speak about another ambition of the administration. again, i'm not going to adhere to your terminology or the chairman's terminology. what i see is a new government agency being proposed to approve consumer financial products, the cfpa. apart from subprime mortgages, can you point to any other consumer financial product that you believe was a but-for cause of this credit crisis? >> i want to just agree with one thing you said in your opening statement first, which is to say there is a lot of dumb regulation in our country.
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and part of our challenge is smarter regulation, not just more regulation. but i think if you look at credit products, marketed to consumers, not just subprime, broader array of mortgage products, and in the credit card area, beyond credit cards too, there were a lot of examples of practices that we should not have tolerated in this country. >> i believe you, mr. secretary. but the question is, besides subprime mortgages, was it viewed as a central cost, since you know the fed has already issued their final home mortgage disclosure rules under regularization z and so either one, it's inadequate. i guess i'm asking this question. why come up with an agency that has the power to ban or modify mortgages, ban or modify credit cards, ban or modify remittences, and i respectfully disagree with the chairman, i read the language of his bill, i guess we can have two different lawyers look at it and decide what it means to have the ability to render unlawful unfair acts and practices that
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are subjectively decided on by this five-person unelected board. >> congressman jeb hencerling is doing the latest questioning of tim geithner. and let's listen in as we continue with "power lunch." >> it's a commission -- it's a set of five commissioners appointed by the president, confirmed by the senate, not unelected bureaucrats. and -- and with -- with authority that now exists in a bunch of other agencies. we want to put it into one place. >> the gentleman from new york is recognized for five minutes. >> welcome, mr. secretary, and thank you for your service. the -- a ticking time bomb is the commercial mortgage loans, roughly $1 trillion will become due in the next couple of years, and the credit markets are totally frozen. i am told they can't get
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refinancing anywhere. so we will be looking at bankruptcies and defaults that will have a terrible if he can on the regional banks that have invested in commercial -- heavily in commercial mortgage loans, and community banks, not to mention the loss of jobs and commercial activity. and my question is that i'd like to know if you're putting some of your creative attention to this problem. i know that treasury came forward with a proposed guidance on residential-backed security, mortgage-backed securities that allowed them to restructure. as you know, under current law, the parties have to wait until a default is imminent before borrowers would put up new capitals. and so -- and there has been some indication that treasury is looking at issuing administrative guidance that would temporarily ease these rules, so that borrowers can proactively sc


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